Philips Plans Breakup to Focus on Health, Consumer Goods

Royal Philips NV Chief Executive Officer Frans van Houten is splitting the 123-year-old Dutch company into two, separating the lighting unit as he focuses on health-care equipment and consumer goods.

Philips will merge its health-care and consumer goods assets into one operation called HealthTech with 15 billion euros ($19 billion) in sales, the Amsterdam-based company said today in a statement. Lighting operations will become a standalone company with 7 billion euros in revenue, and Philips will consider several options for the ownership structure, including an initial public offering.

The split echoes a move by rival Siemens AG, which spun off its entire lighting division last year as the industry faces competition and shifts towards LEDs, which are smaller and more energy-efficient than traditional bulbs. The combination of health-care and consumer operations spanning shavers to air purifiers may help Van Houten, who took the helm in 2011, to tap demand for gadgets that allow consumers to control and track their health or sports activities.

“It’s a bold move,” said Marc Hesselink, an analyst at ABN Amro in Amsterdam. “It shows the company’s focus on one point, health care.”

Philips, the world’s biggest lighting company, climbed as much as 4 percent to 24.45 euros in the Dutch capital today, the biggest intraday gain since June. The stock was up 3.5 percent as of 11:20 a.m., valuing the company at 23.3 billion euros.

‘Right Time’

“I do appreciate the magnitude of the decision we are taking, but the time is right to take the next strategic step,” the CEO said in the statement. He meets analysts and investors in London today to outline his reasoning for breaking up one of the Netherlands’ most iconic companies.

Van Houten has been focusing the company on more profitable businesses to keep up with competitors such as General Electric Co. and Siemens. Earlier this year, the company sold its television division and the DVD and multimedia divisions -- which are the company’s heritage -- and announced it would create a standalone company from its lumileds and automotive lighting. In 2006, Philips sold an 80 percent stake in its semiconductor business NXP to a group of buyout firms. Philips sold its remaining stake in 2010.

Philips said it will start moving its lighting business into a separate legal structure and consider various options “for alternative ownership structures with direct access to capital markets.” Van Houten expects the process to take 12 to 18 months and said lighting will be on its own feet in 2016.

Shifting Market

The market for lighting is shifting from basic demands for products to more complex systems and services, and separating the company will enable it to have a sharper focus and investment strategy, van Houten said.

GE could be the next manufacturer to seperate from its lighting unit, according to analysts including Nicholas Heymann, a William Blair & Co. analyst in New York. GE, which has been synonymous with light bulbs since its founding by Thomas Edison in the 19th century, held talks to sell some or all of its consumer business in 2008, an effort that was stymied by the global financial crisis. GE’s lighting unit isn’t currently for sale, a person familiar with the company’s strategy said this month.

Philips reiterated 2016 goals, including a compound annual growth rate for comparable sales of 4 percent to 6 percent, with an earnings before interest, taxes and amortization margin of 11 percent to 12 percent. For the second half of 2014, the company predicts adjusted Ebita to be below the same period a year earlier because of the suspension of a health-care production facility in Cleveland, legal provisions and weaker demand in some markets.

Philips said a purge on costs to raise profitability will lead to an extra 100 million euros in savings next year, rising to 200 million euros in 2016. These additional savings come on top of already announced 1.5 billion euros in cost cuts by 2015.